GENERAL MARKET CONDITIONS

All I can say is that US dollar gains are pain for precious metals and energies. Highly oversold conditions exist in gold, silver and crude oil. Growth rates in other countries are now slowing down. This is the lagging effect of higher energy prices and a US slowdown. The focus of these central banks has switched from managing inflation to growth and some of them may cut interest rates this year. This has resulted in growth differentials between US and other nations getting narrowed and gains in the US dollar.

IS THE SUPER CYCLE IN COMMODITIES OVER

My answer is “No”. Commodities have more to go and the current fall in commodity prices is a part and parcel of a long term bull run. Long term bull runs are accompanied by sharp slides as well. Fundamentals for commodities have not changed. Global population continues to rise with the passing of each day. There are more mouths to feed every second. Urbanisation is getting faster which means forest cover being reduced to accommodate agriculture. This further accentuates global warming and crop failures. Add to this the increase in acreage under bio fuels. This cycle will continue unless global population stabilizes or reduces.

Do not expect global growth over five percent endlessly. Coordinated central bank effort to ensure higher growth rates and their protection policy of supporting failed/busted banks/financial institutions cannot last long. Now every major banks/financial institution knows that if they get busted their central bank is there to protect them. Once the central bank protection policy fails another super cycle in commodities will start which will end only with proctecionism.

A long run bull run does not mean over twenty percent gains in less than six months as we have seen in the first half of 2008. It’s all about the pace of rise for any instrument. If the pace of rise is very high then the pace of fall will be double. Further if any commodity gains backed without any rise in physical demand then the crash will be imminent sooner than later. This is what has happened with crude oil and other commodities.

Before I end, commodities does not mean just precious metals or energies. Commodities include precious metals, base metals, energies and soft commodities. If China starts to slowdown then base metals (including steel) will be the first to get ripped apart and producers will be forced to reduce production. Soft commodities long term story is here. But for the rest namely precious metals, base metals and energies with the long term bull run there will be phases of short term bear runs as well.

WHAT NEXT

In the short term commodities will remain under pressure as long the US dollar continues to gain. But after a certain period there will be a delinking between commodities and the US dollar. The next bull run in commodities will be accompanied by increase in physical prices (instead of just future prices) and the pace of rise will be slow and sustained. Unless gold falls below $680 and silver below $9.50 and crude oil below $80 the long term bull run will be intact.


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